Blackstone sizes up Masters

Masters is believed to have attracted the interest of global private equity giant Blackstone. Photo: David Mariuz

Global private equity giant Blackstone is said to be sizing up the Masters business, amid talk Woolworths is already engaged with a number of parties over the failed hardware chain.

Blackstone would not comment on what it referred to as "speculation" but it's understood the investment heavyweight is taking a close look at the Masters properties, as well as the hardware chain.

It's not clear whether Blackstone's target is the underlying large-format retail sites or the properties and the hardware business, which hardware analysts suggest could turn a profit with a different brand and product focus.

One retail analyst said the individual Masters properties could easily be carved up into separate retail tenancies by an experienced property operator and run on good yields as small shopping centres.

The challenge for Woolworths, one analyst said, was balancing the potential return on liquidating the home-improvement operation with the cost of selling it, which would ensure the survival of a competitor for Wesfarmers' dominant Bunnings chain.

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"The question is how much is Woolworths willing to sacrifice to maintain a competitor to Bunnings," the analyst said.

Backfired spectacularly

Masters was conceived as a mechanism to weaken Wesfarmers' capacity to turn around the Coles supermarket operation, a strategy that backfired spectacularly and left Woolworths with losses of $600 million.

Bank of America Merrill Lynch analyst David Errington forecast Woolworths could recoup more than $1 billion from the liquidation of the home-improvement operation's assets, including 65 Masters stores and its Home Timber & Hardware operation, as well as two distribution centres and five undeveloped sites.

Market watchers suggest a sale price for home-improvement businesses is likely to be lower than this, given the losses associated with Masters, but it's understood a number of large-format retail brands, such as Ikea, Costco and Spotlight, are already running the ruler over properties.

Bunnings is believed to have designs on up to 25 of the Masters sites and Metcash is understood to have reached out to Woolworths about Home Timber & Hardware business in the middle of 2015.

Spotlight Retail Group deputy chairman Zac Fried confirmed the operation was looking for sites for its Spotlight and Anaconda brands.

Mr Fried said it took about two years to develop a new big-box retail property and that was possible only if you could find the right site in the right position.

The Masters sites provide almost instant expansion opportunities for brands like Spotlight and analysts suggest demand from retailers or property investors could ultimately support better-than-expected prices for the Masters operation.

Under-valuing assets

One market watcher said analysts had a long track record of under-valuing assets because they based their calculations on current earnings momentum rather than the "strategic value of non-replaceable assets".

Woolworths and its Masters partner Lowe's have both engaged independent valuers to put a price on the US retailer's 33.3 per cent stake, after failing to reach agreement in their initial discussions.

Woolworths lists the Lowe's put option as an $886 million liability on its books but analysts say it could be worth anywhere between $180 million and $800 million.